No quick improvement in returns: Wood

Investors should wipe the last dozen years of equity performance from their memories, says Russell Investments' Stephen Wood.

Wednesday, February 27th 2008, 7:08AM

by Rob Hosking

Wood, who heads up Russell's investment team in New York, told an Association of Superannuation Funds of New Zealand lunch in Wellington this week, that investors who had entered into the market over the past 15 years or so would have a distorted view of how markets perform over the longer term.

Between 1995 and 1999 the US equity markets grew by 20.3% a year.

"By 1999 professional investors were being fired by their clients because they weren't being aggressive enough."

But that period – the second half of the 1990s – was something of a one-off.

"I don't think we'll ever see it that good again."

The period 2000-2004 saw a turn the other way: "bonds beat shares 10% on an annualised basis. That's just ridiculous - the bond guys can't even think in numbers that big."

But what happened in that period, he says, was investors became greedy for yield.

"They became yield pigs. And as it became more scarce people got more demanding for more complex products which produced higher yield.

"We are now paying for the sins of that environment. People didn't want stocks; they wanted things that looked safer - like CDOs. And they bought those, and other things they didn't understand and maybe weren't things that were understandable anyway."

Taking a longer perspective, Wood says the equity risk premium between 1974 and 1994 was 4.4%.

The period since then may have had huge volatility but when it was annualised out, the equity risk premium was 4.5%.

That means investors should take a longer-term perspective and not panic about the current market downturn.

Wood does not expect matters to improve quickly – bad news is likely to continue for the next three to six months, he says.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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